CAR Red Alert on anti-deficiency bill. We need you NOW!

C.A.R.-Sponsored Bill to Protect Borrowers From Lenders

Call Your State Senator Today

C.A.R. is sponsoring SB 1178 (Corbett) to extend anti-deficiency protection to homeowners who had refinanced from “purchase money” loans and are now facing foreclosure. C.A.R. is sponsoring SB 1178 because most homeowners don’t know that when they refinanced from their original loan they lost their legal protections and now may be personally liable for the difference between the value of the foreclosed property and the amount owed to the lender. SB 1178 will be voted on soon by the entire Senate.

California law has protected borrowers from so-called “deficiency” liability on their home mortgages since the 1930s, but the evolution of mortgage finance requires that the statute be updated.

Current law says that if a homeowner defaults on a mortgage used to purchase his or her home, the homeowner’s liability on the mortgage is limited to the property
itself. The law has worked well since the 1930s to protect borrowers, ensure the quality of loan underwriting and allow borrowers brought down by financial crisis to get back on their feet.

SB 1178 is consistent with the intent of the original law and simply updates it for modern times. Current law was intended to ensure that if someone lost their home to foreclosure, they wouldn’t be liable for additional payment. Since the law was passed over 70 years ago, homeowners refinancing from the original loan to lower their interest rate has become a commonplace. The 1930s legislature didn’t anticipate how mortgages would change over time.

As things stand today, lenders could pursue families to collect this “debt” years down the road. Lenders have up to ten years to collect on the additional debt after a judgment has been
entered on the foreclosure. Years after a family has lost their home, they could find themselves in even more financial trouble. Lenders could even sell these accounts to aggressive collection agencies or even bundle them into securities. The end result would be banks who didn’t lend responsibly in the first place coming after families for even more money that they don’t have.

C.A.R. is Sponsoring SB 1178 because:

·
SB 1178 is fair. Home buyers, and lenders, entered into the purchase with the idea that the mortgage would be non-recourse debt, and that the lender would look to the security (the house) itself to make good on the debt if the borrower cannot.  mIt meets the legitimate expectation of the borrowers, who have no idea that they are losing this protection by a refinance. Home owners didn’t know that their refinance exposed them to personal liability, and new tax liability, on the note. It would be unfair to allow a lender, or someone that has purchased a note from a lender, to pursue the borrower beyond the value of the agreed upon security.

·     SB 1178 is consistent with the intent of the original law and simply updates it for modern times. Current law was intended to ensure that if someone lost their home to foreclosure, they wouldn’t be liable for additional payment. Since the law was passed over 70 years ago, homeowners refinancing from the original loan to lower their interest rate has become a commonplace. The 1930s legislature didn’t anticipate how mortgages would change over time.

·     Lenders could pursue families to collect this “deficiency debt” years down the road. Under current law, lenders have up to ten years to collect on the additional debt after a judgment has been entered on the foreclosure. Years after a family has lost their home, they could find themselves in even more financial trouble. Lenders could even sell these accounts to aggressive collection agencies or even bundle them into securities. The end result would be banks who didn’t lend responsibly in the first place coming after families for even more money that they don’t have.

·     SB 1178 does NOT apply to “cash-out” refinances, unless the money was used to improve the home and it doesn’t apply to HELOCs.

Be part of C.A.R.’s Government Affairs Team and help pass SB 1178. Call your state Senator TODAY and urge him or her to vote “YES” on SB 1178.

Real world effects:

In 2006, Mary and her spouse have a nice median priced home and a $500,000 mortgage.  Because it is a “purchase money” mortgage, if she defaults or walks away from the house, the lender’s only option is to take the house by foreclosure.

In 2006, Mary decides to refinance the house because interest rates have become so much more attractive.  They refinance their original “purchase money” mortgage, and begin paying on their new $500,000 mortgage. Nothing fancy, no new debt, no cash out, no consumer spending built into the loan – just a lower interest rate. Unbeknownst to Mary, and with no notice from the lender, she has lost the anti-deficiency protection that applied to the original purchase money note. Now, if she loses her job and defaults on the loan, the lender can sue her personally and not only foreclose on the house, but also get a judgment against her for the difference.

In 2009, Mary’s house is “upside down” and only worth half of what it was in 2006 – so, she could lose her house, and still owe the lender more than her original equity. Even worse, the lender can hound her for that liability for the next 10 years whenever she gets a new job or acquires any additional asset. Call Senator Dennis Hollingsworth today at: 1-800-672-3135, pin # 196519886 and
urge him to vote yes on SB1178.